Dumping, Antidumping Duties, and Price Undertakings: Policy Implications of Trade in Quality-Differentiated Products

Abstract

This paper examines which types of firms, from a developed country (DC) or a less developed country (LDC), tend to practice dumping, using a two-market equilibrium analysis of trade in like products. Specifically, we present a vertical product differentiation model of duopolistic competition between a DC firm and an LDC firm under free trade to show that the DC firm sells a higher-quality product without dumping. In contrast, the LDC firm sells a lower-quality product and practices dumping in the DC market by charging a price lower than the product's price in its LDC market. As such, dumping is a signal of lower product quality. The imposition of an antidumping duty by the DC government increases domestic welfare. The LDC's social welfare may increase if its exporting firm accepts a price-undertaking rather than dumping. From the perspective of world welfare, defined by aggregating the welfare of the trading countries (DC and LDC), the trade damage measure of imposing antidumping fines on LDC dumping is Pareto-improving compared to free trade (under which dumping takes place) and price-undertakings.